Krugman & Co.: Austerity's Failure Everywhere You Look
The Keynesians win every argument, say notable economists, so why does fiscal policy refuse to budge?
The last week has been a flurry of headlines decrying the complete and utter failure of the 'austerity experiment' across the globe, with an influential academic paper from Harvard economists becoming the poster-child not only of poor scholarship but also failed common sense.
As New York Times columnist and Nobel economist Paul Krugman notes in his Friday column,
Economic debates rarely end with a T.K.O. But the great policy debate of recent years between Keynesians, who advocate sustaining and, indeed, increasing government spending in a depression, and austerians, who demand immediate spending cuts, comes close — at least in the world of ideas. At this point, the austerian position has imploded; not only have its predictions about the real world failed completely, but the academic research invoked to support that position has turned out to be riddled with errors, omissions and dubious statistics.
The academic research mentioned is the work of Harvard economists Carmen Reinhart and Ken Rogoff, which was revealed last week to be riddled with spread sheet errors that vastly undercut the paper's conclusion. Those faulty conclusions, however, were widely used by pro-austerity policy-makers on both sides of the Atlantic to justify slashing public spending, imposing harsh cuts on social programs and worker benefits just as economists like Krugman, Joseph Stiglitz, Dean Baker and others were calling for massive new public investments to make up for the massive hole left by the financial crisis spurred by Wall Street malfeasance and a housing bubble in the US.
In a Bloomberg interview earlier this month Columbia University's Joseph Stiglitz was blunt about the historical record. “There is no instance of a large economy getting to growth through austerity," he said. "Austerity leads the economy to perform more poorly. It leads to more unemployment, lower wages, more inequality.”
And just how important was this paper by Reinhart and Rogoff? As Dean Baker explains,
the paper itself was not actually the basis for policy. Rather its finding were being used to provide cover by those who wanted to cut Social Security, Medicare and other programs that enjoy high levels of public support. It would be impossible to garner the political support needed for cuts to these programs on the merits, so the politicians pushing these cuts were happy to use the erroneous findings from Reinhart and Rogoff to advance their agenda.
The Reinhart and Rogoff paper was not used only to argue for cuts to popular social insurance programs, it was also used to argue against government efforts to boost the economy and create jobs. The opponents of these policies argued that efforts to spur the economy would prove to be counterproductive because Reinhart and Rogoff showed us that higher debt levels would mean slower growth.
Their paper was used to imply that any short-term benefit in job creation and increased growth would come with a high long-term cost. The corrected version is far less useful in making this case.
Meanwhile, and beyond the wonky world of academic spreadsheets and the politicos who wield such weapons, the real world was also showing the failures of the policies imposed under such thinking.
As figures released this week from Eurostat (the EU's statistics office) show, the countries that imposed the harshest austerity measures, such as Portugal and Spain, saw their budget deficits increase in 2012 — belying claims that slashing government spending amid a downturn would get their public finances back in order.
And the pain of austerity it most visible in the ongoing public outrage voiced againt the policies. From Spain to Greece, from Ireland to Bulgaria, popular protests have not ceased even if they've slumped off the front pages of major papers.
Both Krugman and Baker wonder whether all the mounting evidence against austerity will compell policy makers -- especially those in the US -- to change course. Neither are particularly hopeful.
For Krugman's part, he says one cannot "understand the influence of austerity doctrine without talking about class and inequality." He continues:
What, after all, do people want from economic policy? The answer, it turns out, is that it depends on which people you ask — a point documented in a recent research paper by the political scientists Benjamin Page, Larry Bartels and Jason Seawright. The paper compares the policy preferences of ordinary Americans with those of the very wealthy, and the results are eye-opening.
Thus, the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. And how should the budget deficit be brought down? The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise.
You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do.
And Baker more or less agrees, writing: "the interests of the wealthy are likely to be the concerns of elected politicians even if they are opposed to the interests of the vast majority of the population."
That is why we see efforts to cut programs like Social Security and Medicare even when these cuts are opposed by large majorities of people across the political spectrum.
The news last week is that the new paper discrediting Reinhart and Rogoff made everything much clearer. The leadership of both major parties is not seeking ways to reduce the budget deficit because there is any reason to believe this will be good for the economy. They are looking for ways to reduce the budget deficit because the wealthy are happy to sustain a situation in which high unemployment weakens workers' bargaining power. This does not paint a very positive picture of the state of democracy in the United States.